Rajan warns of global asset crash

Rajan: Sounding alert

Mumbai, Aug. 7 (PTI): Reserve Bank governor Raghuram Rajan has warned that global markets are at the risk of a “crash” due to lingering competitive loose monetary policies being followed by developed economies.

In an interview to London-based Central Banking Journal, Rajan warned that the current build-up of financial sector imbalances might cause sudden price reversals and sharp spikes in volatility

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” said the former IMF chief economist, who famously predicted the 2008 financial meltdown from which the global economy is yet to recover fully.

“Unfortunately, a number of macroeconomists have not fully learned the lessons of the great financial crisis. They still do not pay enough attention to the financial sector. Financial sector crises are not as predictable. The risks build up until it hits you,” Rajan said.

The RBI governor expressed fears that central banks “may be exhausting room on the financial side and creating a situation where there will be a discontinuous movement in the financial sector.”

Discounting arguments from a section of economists that asset price hike is not due to credit growth, Rajan said problems do not appear to be arising from credit growth although this is an issue in some emerging markets.

Reiterating his warnings that emerging markets are especially vulnerable to big shifts in capital flows brought on by unprecedented monetary accommodation in rich nations, Rajan warned, “There will be major market volatility if such a crash occurs. True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and a prayer.”